Autoliv Earnings: Slight Increase in Output Disruption Dings Results; UAW Strike a Negative

Narrow-moat Autoliv ALIV SDB reported third-quarter earnings per share before special items of $1.66, missing the $1.79 FactSet consensus EPS by $0.13, but it is $0.43 ahead of the $1.23 reported last year. We believe the shortfall was due to a slight increase in customer output disruption sequentially from the second quarter and inflationary cost pressures. Revenue increased 13% to $2.6 billion as volume, customer recoveries, and the chip shortage all improved compared with a year ago. Excluding favorable currency, organic revenue increased 11%, outperforming a 4% increase in global light-vehicle production by 7 percentage points due to launched new business and customer recoveries.

Adjusted operating income jumped 41% to $243 million from $173 million last year. Margin expanded 190 basis points to 9.4% from 7.5% last year on higher volume and cost-reduction initiatives, partially offset by slightly worse customer call-offs compared with the second quarter.

Despite the UAW strike at Autoliv’s Detroit 3 customers, management tweaked 2023 guidance higher with organic revenue growth of 17%, up from 15%, and reduced tax rate to 20% from 32% due to reorganization on cost-cutting efforts. Adjusted operating margin guidance was unchanged at 8.5%-9.0%. The UAW strike had minimal impact on the third quarter, but the firm said it expects $6 million in revenue per week strike impact and assumes the labor shutdown lasts until the end of November in its guidance.

We model revenue slightly below management’s guidance, with organic revenue growth of 15%. Due to high uncertainty remaining from the UAW strike, output disruption (chips, logistics), inflation, war in Ukraine and Israel, and weakening global auto market economies, we assume an 8.5% 2023 adjusted operating margin at the low end of guidance. The time value of money added $2 to our fair value estimate, lifting our fair value estimate to $101 from $99. The 3-star-rated Autoliv shares trade at a 4% discount to our new fair value.